August 06, 2009

Presentation of Financial Statements to a case study

Paragraph 81. As a minimum, the face of the income
statement shall include line items that present the following amounts for the
period:

(a) revenue;

(b) finance costs;

(c) share of the profit or loss of associates and joint ventures accounted
for using the equity method;

(d) tax expense;

(e) a single amount comprising of (i) the post‑tax profit or loss of
discontinued operations and (ii) the post‑tax gain or loss recognised on the
measurement to fair value less costs to sell or on the disposal of the assets or
disposal group(s) constituting the discontinued operation; and

(f) profit or loss.

Paragraph 82. The following items shall be disclosed on the face of
the income statement as allocations of profit or loss for the period:

(a) profit or loss attributable to minority interest; and

(b) profit or loss attributable to equity holders of the parent.

Paragraph 87. Circumstances that would give rise to the
separate disclosure of items of income and expense include:

(a) write-downs of inventories to net realisable value or of property, plant
and equipment to recoverable amount, as well as reversals of such write-downs;

(b) restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring;

(c) disposals of items of property, plant and equipment;

(d) disposals of investments;

(e) discontinued operations;

(f) litigation settlements; and

(g) other reversals of provisions.

Paragraph 91. The first form of analysis is the nature of expense
method. Expenses are aggregated in the income statement according to their
nature (for example, depreciation, purchases of materials, transport costs,
employee benefits and advertising costs), and are not reallocated among various
functions within the entity. This method may be simple to apply because no
allocations of expenses to functional classifications are necessary. An example
of a classification using the nature of expense method is as follows:

Revenue
X

Other income
X

Changes in inventories of finished goods and work in progress X

Raw materials and consumables used
X

Employee benefits expense
X

Depreciation and amortisation expense
X

Other expenses
X

Total expenses
(X)

Profits before income tax
X

Paragraph
92. The second form of analysis is the
function of expense or ‘cost of sales’ method and classifies expenses according
to their function as part of cost of sales or, for example, the costs of
distribution or administrative activities. At a minimum, an entity discloses
its cost of sales under this method separately from other expenses. This method
can provide more relevant information to users than the classification of
expenses by nature, but allocating costs to functions may require arbitrary
allocations and involve considerable judgement. An example of a classification
using the function of expense method is as follows:

Revenue X

Cost of sales (X)

Gross profit X

Other income X

Distribution costs (X)

Administrative expenses (X)

Other expenses (X)

Profit before income tax X

Question 2: Application of AASB 101

Waterworks Limited

Operation Statement

For the Year ending 30 June 2006

Actual 2006

Actual 2005

Income

Revenue

3,224,852

1,399,357

Interest Revenue

540

922

Profit from Discontinued Operations

2,338,102

915,929

Government Payment of Outputs

5,484

9,416

Other Income

18,164

0

Gain on sale of non-current assets

6,206

0

Total Income

5,593,348

2,325,624

Expense

Changes in inventories of finished goods and work in progress

363,971

399,970

Raw materials and consumables used

1,276,189

558,184

Employee benefits expense

1,013,350.00

759,881.00

Depreciation and amortisation expense

129,268

111,687

Interest Expense

26,997

29,149

Administration Expense

52,534

62,003

Operating Expense

139815

109861

Other Expenses

88603

101298

Profit before income tax

3,090,727

2,132,033

Tax Expense

137,621

12,607

Total Expenses

2,953,106

2,119,426

Operating Surplus (Deficit)

2,640,242

206,198

Question 2: Justification of Expense Method

Compared to indirect method, expense
method is provides simple and comprehensive income statement format. This will
not only aid readability and understanding of professionals but more importantly
favor the interest of the general public regarding corporate performance. The
indirect method shows complicated and blurred structure where similar items are
motivated by also distorted belief that manufacturing-related income and
expenses should be de-classified to administrative and marketing income and
expenses. On the contrary, expense method enables organized presentation and
summarized the dealing of the accounting period that enhances functionality.
Negative values are also reduced to a large extent and also normal operational
income/ expenses are de-classified to gains, those arise from joint ventures and
disposal of assets where normal operations of the company is in question.
Therefore, the expense method can present the true position and performance of
the company rather just giving possible loopholes for users to arrive at
misleading conclusions using the hard-to-understand statements.

Question 3: Analysis of Aggregation of Income/
Expense Accounts

Individual Components

Income

Revenue

Revenue from operating activities

Interest Revenue

Interest Revenue

Profit from Discontinued Operations

Transferred manufacturing costs

Government Payment of Outputs

Government subsidies

Other Income

Insurance recoveries

Gain on sale of non-current assets

Gains on the sale of non-current assets

Total Income

Summation of these items

Expense

Changes in inventories of finished goods and work in progress

Opening inventory work in
progress less closing inventory work in progress

Raw materials and consumables used

Opening inventory in raw materials add
purchases and the total is deducted to closing inventory in raw materials